I am a senior editor at Forbes, covering legal affairs, corporate finance, macroeconomics and the occasional sailing story. I was the Southwest Bureau manager for Forbes in Houston from 1999 to 2003, when I returned home to Connecticut for a Knight fellowship at Yale Law School. Before that I worked for Bloomberg Business News in Houston and the late, great Dallas Times Herald and Houston Post. While I am a Chartered Financial Analyst and have a year of law school under my belt, most of what I know about financial journalism, I learned in Texas.

Supreme Court Takes Case Where Landlords Claim Discrimination

The U.S. Supreme Court has agreed to decide whether aggressive housing-code enforcement in the City of Saint Paul amounts to racial discrimination. The lawsuit flips the usual order of things, with landlords complaining that the city has violated the Fair Housing Act, instead of the other way around.

Magner v. Gallagher could have wider impact, however, because it forces the Court to dive into the tricky area of disparate treatment versus disparate impact in the area of housing. Disparate treatment, in a nutshell, is a policy that discriminates against minorities by design. Disparate impact is a policy that discriminates against minorities but without any evidence that discrimination was the intent of the people who designed it. If the numbers show a disparate impact, it’s up to the defendant to prove there was a good reason for the policy and there wasn’t another, less discriminatory way to achieve the same ends.

Lawyers around the country are ginning up suits based on the second theory against banks that are trying to foreclose on defaulted borrowers. The theory, as detailed in this post involving Emigrant Savings, is that low-doc/no-doc mortgages with teaser rates were aimed at minorities as a tool to strip them of their houses. (Never mind that banks lose money by foreclosing on houses; in lawyerland it’s a viable theory that they actually want to seize the collateral for their loans.)

In the Saint Paul case, landlords argue the city stepped up enforcement of its housing codes, beyond the standards for federally subsidized housing, and that raised costs and lowered the availability of low-income housing. A trial court issued a summary judgment against the plaintiffs, but the Eighth Circuit Court of Appeals reversed, saying the plaintiffs could proceed with a lawsuit over the alleged disparate impact of the enforcement effort.

It’s hard to sympathize with the landlords in this case. Poor people deserve safe housing as much as anybody else, and it takes more than a little chutzpah to sue the city for racial discrimination when it is trying to improve the living conditions of minority residents. But the Eight Circuit bought the plaintiffs’ argument that the city might have pushed things too far, citing evidence the head of the housing department “raised inspection standards by directing …inspectors to `code to the max,’ that is, writing up every violation—not just what was called in—and writing up all the nearby properties—not just the reported properties.”

Under the Eighth Circuit’s approach, the plaintiffs merely had to show that the city’s policy had a disparate impact on minorities, which it obviously did (for some reason the court didn’t consider the disparate positive impact code enforcement can have on poor neighborhoods). That forced the city to show it was enforcing the codes for a proper reason. Then the plaintiffs had to show there was another, less costly way to approach the problem. They did that by citing an earlier code-enforcement effort called Problem Properties 2000, in which the city inspectors worked cooperatively with landlords to clean up code violations.

The appeals court rejected the city’s argument that proper code enforcement will always increase the cost of being a landlord. Instead, the judges said there was “evidence that PP2000 generated a cooperative relationship with property owners, achieved greater code compliance, and resulted in less financial burdens on rental property owners.”

The International Municipal Lawyers Association urged the court to take this case to resolve a split among the various circuits over whether the FHA even allows disparate-impact suits. The variety of approaches to determining whether housing discrimination has occurred has led to an “increasingly incoherent body of case law,” the municipal attorneys said.

The Fourth Circuit, for example, rejected a case where plaintiffs claimed that converting a rental buildings to condominiums was racially discriminatory because it raised the price of housing. The court said “crudely stated, the (conversion) placed only one obstacle between a resident and the purchase of his or her unit: money.” And the Tenth Circuit rejected a complaint that subdivision rules prevented the development of low-income housing.

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As a landlord I can tell you the case absolutely has merit. Years ago I rented to a mixed race couple and the city inspector told me I had to have a licence. I had never before ran into this situation. To make a long story short, the city clerck and the inspector made up the licence thing, there was no ordinance at the time and other landlords renting to African Americans ran into the same thing! We requested freedom of information as to who was being license (which was denied) and then we went to the States Attorney (Lisa Madagan of Illinois) who initially got involved, but dropped all interest when her office found out that the city clerk was the County Democratic Party Chairman! The city later made the claim that rental properties were run down and dragging property values down. We took pictures of 75 run down houses at random. We fully expected half of them to be rental properties. ALL OF THEM WERE OWNER OCCUPIED! We showed our results to the city council. As of this date, rental properties are held to a much higher standard than the surrounding owner occupied houses. We also have a requirement that we MUST evict any tenant arrested for a crime. Not if they are convicted, just if they are arrested. This ‘crime free’ ordinance is spreading like widefire through the State of Illinois.